Constellation Brands Inc (STZ) — Q1 2016 Earnings Call Transcript

Thank you, Lori. Good morning, everyone. And welcome to Constellation’s first quarter fiscal 2016 conference call. I’m here this morning with Rob Sands, our President and Chief Executive Officer; and David Klein, our new Chief Financial Officer. This call complements our news release which has also been furnished to the SEC. During this call, we may discuss financial information on a GAAP comparable, organic and constant-currency basis. However, discussions will generally focus on comparable financial results. Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial measures are included in the news release or otherwise available on the company’s website at www.cbrands.com. Please also be aware that we may make forward-looking statements during this call. While those statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations. For a detailed list of risk factors that may impact the company’s estimates, please refer to the news releases and Constellation’s SEC filings. Before turning the call over to Rob, I would like to ask that we limit the number of questions asked during today’s Q&A session to two questions. We received investor feedback last quarter indicating that the call ran long, because we allowed questioners to ask unlimited questions. So I would appreciate your cooperation. Thanks in advance, and now here is Rob.

Thanks, Patty, and good morning. And welcome to our discussion of Constellation’s first quarter 2016 sales and earnings results. As Patty mentioned earlier, I am joined today by David Klein, Constellation’s newly appointed Chief Financial Officer, following the recent departure of Bob Ryder, who served as our CFO for the past eight years. Bob has been a significant contributor to our organization during his time here. His accomplishments at Constellation are numerous and I wish him success in his future endeavors. We have an incredibly talented finance organization, which is why we are expecting a seamless transition for David as he assumes his new role. David brings a wealth of experience to this critical leadership position, most recently serving as the CFO for Constellation’s Beer business, where he was integral in orchestrating our glass sourcing strategy, implementing commodity management processes and instilling production costs management discipline at the brewery. David has also been very involved in the oversight of our Nava brewery build-out, which includes managing capital expenditures at the facility. Now during the past year working with the beer team David has divided his time between Rochester, Chicago, San Antonio and Mexico. I believe that many of you have had the opportunity to meet David and I would like to publicly congratulate him and welcome him to our executive management team. You will be hearing more from David in just a few minutes. Before we get started with our quarterly review, I would also like to take a few moments to discuss this morning’s exciting announcement of Constellation’s planned purchase of the Meiomi wine brand. Meiomi is predominantly a California pinot noir and represents a synergistic high-growth, high-margin accretive complementary tuck-in to our existing portfolio of wine brands. Launched in 2006, Meiomi sold about 60,000 cases in the U.S. marketplace in 2010 and has grown to become a nearly 600,000 case brand since then. It is currently the fastest growing major pinot noir in IRI channels at the $20 luxury price point and has experienced dollar sales growth of more than 50% over the last 52 weeks. In calendar 2014, Meiomi generated more than $65 million in net sales with an operating profit margin profile that significantly exceeds the margin rate of our overall Wine and Spirits business. The right brands with the right financial profile like Meiomi can be efficiently integrated into our distribution platform to provide synergies, scale and root-to-market benefits and it is very similar to our successful Mark West acquisition. As I have previously mentioned, tuck-in acquisitions have been identified as one of our capital allocation priorities, especially those that are strategic, synergistic, good value and meet our strict financial criteria. Meiomi is one of these acquisitions. This acquisition does not signal a change in strategic goals for the business or impact our ability to achieve our targeted leverage range. Our top priorities remained unchanged and they include reducing our debt to less than four times leverage. This creates significant capital allocation flexibility and opportunity to increase returns to our shareholder through dividends, growth and share buybacks. Capturing the organic growth opportunities we see across all of our product categories, completing the brewery and glass plant expansions as planned, while ensuring that we do not impact the tremendous commercial momentum we have within the U.S. beer markets and complementing our organic growth efforts and shareholder cash return focus with complementary brand acquisitions that enhance our portfolio. These priorities are intact and will remain our core focus for delivering shareholder value over the long-term. And now I would like to shift the focus of our discussion to our quarterly results, which reflect a great start to our new fiscal year. Overall, our Beer business has been unstoppable, our Wine and Spirits business is on track to meet its goals for the year and we continue to progress as planned with our Mexican brewery and glass plant expansions. During the first quarter, the Beer business generated results that exceeded our expectations, posting double-digit sales and depletion growth. These results are some of the best in the industry. In fact, during the first quarter, Constellation Beers delivered about two-thirds of the total U.S. beer industry volume growth. Leading volume gains among U.S. brewers for the eight consecutive quarters in IRI channel. So what’s driving this phenomenal level of growth and momentum? We continue to experience robust consumer demand for our iconic portfolio of Mexican beers, with our top five brands experiencing solid growth across almost all channels and packaging sizes during the quarter. In addition, we are benefiting from strong sales execution and excellent ongoing support from our wholesalers. The introduction of creative new marketing programs that resonate with consumers, increased investment and enhanced media plans, continued distribution gains across the portfolio for our core brands and package types, and the expansion of product offerings like Corona Extra cans, Modelo Especial Chelada and Corona Light draft. The Beer business kicked off the 120 days of summer-selling season by posting market share gains during the Cinco de Mayo holiday led by Corona Extra and Modelo Especial as the number one and number two share gainers respectively across all U.S. beer brands. The new Corona cans have been a hit with consumers. We dedicated significant media support behind the launch with English and Spanish language TV across the NBA playoffs, Univision and Comedy Central. We see great opportunity with the can launch as this format currently represents only a small portion of total Corona Extra volume. Modelo Especial continues to maintain strong momentum as the number two imported beer in the U.S. and delivered depletion growth of nearly 20% during the first quarter. Modelo Especial launched its first ever national English language campaign with targeted programming including first round NBA playoffs on ESPN and TNT. This effort will continue into the summer. Corona Light draft expanded its launch with 28 new wholesalers in existing markets. We also activated the Kenny Chesney sponsorship during the quarter which will continue through September. And I’m sure that many of you viewed our new jewel branded Corona Extra Casa Noble tequila TV spot leading up to the Cinco holiday, which was aired on a variety of high profile TV programs. This advertisement drove new distribution of Casa Noble in select on and off-premise accounts. Overall, the strong results of the Beer business achieved in the first quarter are the primary driver of the upward revision to Constellation’s EPS guidance for fiscal 2016. As such, we now expect beer volumes to increase mid-to-high single digits which should drive net sales growth of approximately 10% and underlying operating income growth of 13% to 15%. Beer operations continue to run smoothly the brewery and glass plant expansions that are proceeding as planned. Our key performance metrics and initiatives for the brewery are on or better than target. The first incremental 5 million hectoliters of capacity is expected to become operational by the end of calendar 2015. During the first quarter, we achieved high levels of productivity and record capacity utilization at the Nava brewery and construction of the second furnace at the glass plant is underway. And we have begun site excavation and installation of utilities for the previously announced incremental brewery capacity expansion from 20 to 25 million hectoliters. Overall, I’m very pleased with the outstanding commercial and operational performance of the Beer business. Given the continued strength of this business, we are currently evaluating plans for our next increment of capacity beyond 25 million hectoliters. And now I would like to discuss the operational results for our Wine and Spirits business. During the first quarter, we experienced improving depletion in consumer takeaway transfer U.S. wine business, posted better than expected results in Canada and delivered excellent sales in depletion growth trends for our portfolio of spirit brands. We are benefiting from positive mix trends across the business. We gained share of feature and display activity at retail. And we are maintaining IRI volume share in the U.S. wine market. We successfully maintained margins for the Wine and Spirits business in the first quarter after delivering operating margin expansion of 130 basis points in fiscal 2015. And we remain on track this year to maintain the expanded margin achieved last year. As outlined last quarter, one of our key strategic objectives for this year is the focus on our marketing efforts on a subset of our focus brands in order to drive key brands that have scaled higher margins and the greatest growth potential. Now, let me give you a few examples of what we currently have underway. Black Box will be running two commercials chanting the exceptional value of this premium box wine has to offer. The commercials air this summer and for the first time will run in the fall season as well. Woodbridge by Robert Mondavi kicked off its Moments TV campaign in June and is expected to garner more than 1 billion LDA media impressions through year-end. You can see the spot on channels like HDTV, Lifetime, Travel Channel, Food Network, TLC, Bravo, TBS and E! We’ve created a new fully integrated digital advertising campaign for Clos du Bois, which is running now through the end of summer to engage consumers with this French-inspired California wine. The quality of our wine brands has also attracted some terrific media attention this spring, with mentions of brands such as Black Box, Kim Crawford, Mark West, Robert Mondavi Winery, Ruffino, the Dreaming Tree and our newest brand, Tom Gore Vineyards in such recognizable publications as Fortune.com, Wine Enthusiast, Bloomberg.com and E! Online. Recent ratings further attest to our portfolio strength, with 90 plus scores coming from the Wine Enthusiast and Wine Spectator for luxury tiers of our Ruffino, Kim Crawford and Ravenswood brands. You may have noticed that beginning with the first quarter we’ve changed the composition of our reported Focus Brands in order to better align this disclosure with our current brand priorities on the sales and resource focus for the Wine and Spirits business. We now have 15 brands that comprise our Focus Brands versus 20 brands previously. Notable additions include two of our innovation brands, The Dreaming Tree and Ultra Premium multi-varietal wine, which was introduced about three years ago in collaboration with singer, songwriter, Dave Matthews and SAVED, a luxury brand inspired by contemporary artist, Scott Campbell who is perhaps known best as the tattoo artist to the Hollywood stars. And we experienced overall depletion growth of 3.5% for the first quarter, with our Focus Brands growing nearly twice that rate. These results were driven by a number of our fastest-growing brands including Kim Crawford, Ruffino, Simi, Black Box, Estancia, Clos du Bois, The Dreaming Tree and Woodbridge by Robert Mondavi. For our spirits portfolio, we experienced excellent net sales growth of 8% and solid depletion trends in the first quarter, driven by Casa Noble Tequila, Paul Masson Grande Amber Brandy and SVEDKA Vodka. Within IRI channels, our dollar sales growth in spirits continued to outperform the market during the quarter. Now before I turn the call over to David, I’d like to provide some context for the cost effectiveness plans we have initiated as many of you may have seen mentioned in this morning’s press release. As we transform our business, it’s becoming increasingly important to evolve our organizational structure for sustainable long-term growth in a way that can bring out the best in the business today and at the same time position us to adapt quickly and effectively in responding to future business needs. As such, we have shifted resources and investments to long-term growth opportunities across the business as well as improved efficiency by consolidating and streamlining resources in areas where it makes the most sense. The position changes associated with this initiative will be minimal but the majority will occur within our Wine and Spirits business. The objective of this effort is to build the best organization that will enable us to be more agile and effective while unlocking growth potential. David will provide a financial overview of the program in a few minutes. In closing, I would like to reiterate that everything we do at Constellation Brands is guided by one of our most important strategic imperatives to apply rigorous financial discipline. And our financial discipline involves maintaining our commitment to our capital allocation priorities, which include ongoing debt reduction to less than four times leverage, potential share repurchases and dividend increases, and tuck-in acquisitions like Meiomi, Mark West, and Casa Noble. I would also like to remind everyone that during my tenure as CEO for the last eight years, our team has created significant value by transforming and simplifying our product portfolio through the rationalization and divestiture of business assets in an effort to premiumize and grow the business. And my plan for the future is to continue to deliver value and generate growth. With that, I would now like to turn the call over to David Klein for financial discussion of our first quarter results.

Thank you, Rob. And good morning, everyone. I first want to say I am excited about my new role at Constellation. This is a stellar company with tremendous prospects in a dynamic industry. I believe Constellation offers one of the best combinations of top-line growth and profitability in the beverage alcohol space. I look forward to partnering with Rob and the rest of the executive management team, as we remain focused on executing Constellation’s strategic goals and our capital allocation priorities, as outlined by Rob earlier. I have had the pleasure of meeting members of the investment community at investor events in my previous roles as Treasurer or as CFO of our Beer business. I look forward to spending more time and building relationships with you going forward in my new role. With that, let me provide some Q1 highlights. Comparable basis diluted EPS was up 18%. We paid out a quarterly common stock dividend for the first time in our history. And the continued robust marketplace momentum for our Beer business, along with our agreement to acquire the Meiomi wine brand, are driving our full year comparable basis diluted EPS projection up $0.10 to a range of $4.80 to $5 for fiscal '16. Let’s take a closer look at our Q1 results where my comments will generally focus on comparable basis financial results. Consolidated net sales on a constant currency basis grew 8% for the quarter. We continue to see robust marketplace momentum for our Beer business with depletion growth of 10%. Beer net sales increased 11% on volume growth of 10%. Wine and Spirits net sales on a constant currency basis increased 4%. This primarily reflects higher shipment volume and favorable mix. Net sales benefited from the overlap of U.S. distributor inventory destocking net of a related distributor destocking payment, which occurred during first quarter fiscal 2015. For the quarter consolidated gross profit increased $68 million, up 10% with gross margin increasing 130 basis points. Beer gross profit increased $65 million primarily due to volume growth and favorable pricing. Beer gross profit margin increased nearly 2 percentage points to 49.2%. This was driven primarily by pricing and COGS favorability. Wine and Spirits gross profit was up slightly as volume and mix benefits were effectively offset by the overlap of the distributor destocking payment. Gross margin held steady at 40.7% as the benefit from mix and favorable COGS were offset by the overlap of the distributor destocking payments. Consolidated SG&A for the quarter increased $18 million. Beer SG&A was up $16 million primarily due to the higher marketing spend. Due to the factors just mentioned, consolidated operating income increased $50 million and consolidated operating margin improved 130 basis points. Beer operating margin increased 170 basis points, while Wine and Spirits operating margin held fairly steady. Interest expense for the quarter was $78 million, down 10%. The decrease was primarily due to lower average interest rates. At the end of March, our total debt was $7.3 billion. When factoring in cash on hand, our net debt totaled $7.2 billion, a decrease of $51 million since the end of fiscal 2015. I would like to take a moment here to note that we are currently in the process of revising our credit agreement to take advantage of the favorable market conditions to extend tenor and ensure our facility is appropriately sized and flexible given the recent growth of our business. Our effective tax rate for the quarter came in at 31.8% and compares to a 32.5% rate last year. The decrease was primarily driven by various favorable tax items. We still anticipate our full year tax rate to approximate 30.5%. Now let’s review free cash flow which we define as net cash provided by operating activities less capital expenditures. For the first quarter, we generated $76 million of free cash flow, compared to $101 million for Q1 of last year. Operating cash flow totaled $206 million versus $232 million for the prior year quarter. The decrease was primarily due to the timing of interest payments and overlap of the tax refund in Q1 FY15, partially offset by our earnings growth. CapEx for the quarter totaled $130 million, which was essentially even with Q1 last year. For fiscal '16, we still expect free cash flow to be in the range of $100 million to $200 million. Our projection reflects operating cash flow of $1.15 billion to $1.35 billion and CapEx of $1.05 billion to $1.15 billion for fiscal '16, which includes $950 million to $1.05 billion for beer. Before reviewing our fiscal '16 P&L outlook, let me provide a few financial comments related to the Meiomi transaction. We expect to finance the $315 million purchase price with borrowings under our credit agreement. We expect the transaction to close around the beginning of August and to be $0.03 to $0.04 accretive to EPS for fiscal '16. We are only buying the brand, inventory and some great supply contracts, so we expect the integration of the brand into our Wine and Spirits business to be seamless. Now let’s move to our full year fiscal '16 P&L outlook. As mentioned earlier, as a result of the continued strong marketplace performance for our Beer business and the expected accretion benefit from Meiomi, we are increasing our comparable basis diluted EPS projection to $4.80 to $5 versus our previous $4.70 to $4.90 range. The Beer business is now targeting mid to high single-digit volume growth, net sales growth of approximately 10% and 13% to 15% operating income growth. As a reminder, fiscal '15 beer shipments ran ahead of depletions as distributors brought inventories back to more historical levels. As a result, we expect our fiscal '16 depletion growth rate to be above the shipment growth rate and therefore in the high single-digit range. We continue to project beer operating margin to expand and be in the 33% range for fiscal '16. This is expected to be driven primarily by gross margin improvement, as we plan to continue to make investments in marketing and our SG&A structure. We expect our beer operating margin to fluctuate throughout the remainder of the year, as we start to bring additional brewery capacity online. During Q2, there will be an annual inflation increase under our Interim Supply Agreement with ABI for the finished beer that they are currently supplying us. For the Wine and Spirits business, we continue to expect net sales and operating income growth to be in the low to mid single-digit range before any benefit from the Meiomi acquisition. Our fiscal '16 comparable basis guidance excludes comparable adjustments, which are detailed in the release. These adjustments include approximately $20 million of anticipated costs associated with the cost effectiveness plan outlined by Rob earlier. Cost savings from this initiative are expected to be reinvested in areas of the company that drive growth. We ended Q1 fiscal '16 with a net debt to comparable basis EBITDA leverage ratio of 3.9 times. Even with our projected higher level of CapEx spend, dividend payments and the funding of the Meiomi acquisition, our strong projected earnings and operating cash flow growth have positioned us to be below the four-times leverage range at the end of fiscal '16. Operating below the four-times range combined with our strong free cash flow generation capabilities provides us significant financial flexibility, especially as beer CapEx spend normalizes. This flexibility combined with our continued focus on our significant organic growth opportunities and strong free cash flow generation capabilities should provide us ample opportunity to increase future returns to shareholders through dividend growth and share buybacks. With that, we are happy to take your questions.

Yes. Thanks. Good morning, everyone. So Rob just…

Good morning, Nik.

Good morning and congratulations, David.

Thank you.

Real question strategically on the wine portfolio, Constellation still has a lot of exposure to the low end of the wine segment despite focusing internal and M&A resources on becoming bigger at the higher end. So I’m just curious, have you guys ever thought about becoming a lot more aggressive on shedding the low end of the portfolio and then taking those proceeds to innovate more at the high end and complement it with more bolt-ons like the one we saw today?

Yeah, Nik, that’s something that we have done over the years. We’ve really shed the bulk of the low-end portfolio. I think around, I don’t know, 2008 when I became CEO and we disposed off the Almaden and Inglenook brands, which were primarily by that time 5-liter bag in the box which really represents the vast majority of the sub-premium market. Now that said, we do desire to continue to offer a full portfolio of wine to both our wholesale and retail customers, because even elements of the sub-premium part of the business remain important. And for us to remain a relevant supplier, we feel that it’s strategically important to remain in that business. Now that said, we really do not focus any of our advertising or marketing dollars against those brands and have really shifted almost virtually a 100% of those resources against our higher margin or I should say high-margin focus brands and to drive a positive mix in the business. So that’s currently where we stand. We don’t have any plans to divest anymore of the tail part of the portfolio.

Great. And then just one real quick one on capital allocations, I know you guys referenced dividends and buybacks. And if you can just provide a little bit more context on buybacks, I mean, can we expect something once the beer CapEx is kind of passed its peak or is that something that could happen sooner?

Go ahead, David.

Yes. So, as you probably know we still have about $700 million remaining under the previously authorized share repurchase program. I would say as Rob outlined our capital allocation priorities, we do have the brewery build out underway. We have just recently instituted the dividend. And so I think we need to work our way through those but we are open to share repurchases once again when the time is right.

Great. Thanks guys.

Good morning Rob and welcome David. I have a question about the Beer business. You have increased your outlook for the year. Is that simply because your performance in the first quarter was better than expected, and your plans haven't really changed, or has your outlook for the remainder of the year improved as well?

I think it’s both Bryan. I mean the Beer business volume and dollar growth is tracking well ahead of our expectations. We don’t really see a chink in that armor in the rest of the year. So we really don’t have any reason to believe at this stage that there will be a significant slowdown. So, yes, that has caused us to realistically raise our guidance on beer growth for the year to 10% net sales.

Okay. As a follow-up about the production starting up in Nava and the additional production expected by the end of the year, have we begun any test batch brewing? Could you please provide an update on our progress towards achieving that target?

Yeah. Bryan, so there is a lot of activity going on in Nava as you would expect, right. And so, the first thing is that we are going to see that really begin to come online our packaging lines. We don’t expect the actual brew house to be in a functioning state until closer to the end of the calendar year. But I can say that, at this point everything is going according to plan in the build-out at Nava.

Okay. Thank you.

Thank you. Good morning, everyone.

Hi, Judy.

Hi.

Good morning, Judy.

So first, just, Rob, regarding the CFO transition announcement and understand that Bob is obviously not on the call to answer this question? But, I guess, the timing was somewhat unexpected for many people? So anything you can share with us in terms of what led to that decision, particularly on the timing issue?

No. I mean, there is really nothing to share. I mean, obviously, the timing was related to when we had these discussions internally and when, therefore, it was appropriate to make the announcement relative to Bob’s departure. So there is really nothing more or less to it than that. Obviously, when the decision was made that that Bob was leaving, we had to make an announcement and I don’t really care when that announcement would have been made it would have seemed as it did at whatever time it was, so that’s pretty much it, Judy.

Okay. Sorry, David.

Hi.

Okay. So, second question, David, just in terms of the gross margin on the beer side, I mean, certainly, Q1, I think, came in a little higher than what we would have anticipated and I think you commented on some of the fluctuations that you expect throughout the year? But can you give us a little bit more color, just in terms of the bridge for Q1 and how that sort of evolves as we get into the balance of the year?

Yeah. So what you would see year-over-year, Q1 to Q1 is margin expansion driven by pricing, as well as COGS improvement as our procurement team has taken over the procurement activities at the brewery. For the rest of the year and by the way the brewery also was operating effectively at capacity in the first quarter which gives us the better number as well. For the rest of the year, we are going to bring on several packaging lines, we are going to bring on part of a new warehouse and we are going to bring on the first 5 million hectoliters of brewing capacity. And once we put them in service, meaning, we have run beer down the line or beer through the brew house for commercial sale, we then put those assets into service, which means we begin depreciation. However, at that point, there is still a lot of work as you might imagine that goes into optimizing the lines in the brew house and the warehouse, and any of that expense that happens after we put the assets into service falls right to the bottom line as an expense, right. So we expect that that’s going to create some of the choppiness for the rest of the year. And then, additionally, as I mentioned, in my initial comments, we have an inflation adjustment on the finished goods that we are buying from ABI that actually took effect the first week of June. So I think that really kind of bridges this out from the 34.8% really to the 33% range, which we called out.

Okay. And just on clarification, that also includes some of the packaging procurement savings that you would have seen already or expected to see as you get into the balance of the year?

We have incorporated the excellent benefits achieved by our procurement team into the guidance we have provided for the year.

Okay. Got it. All right. Thank you.

Thanks and good morning everyone, and congratulations David. I have two questions. First, regarding the beer segment, we noticed a price mix just below 1%, which is similar to last quarter. Can you share your thoughts on that number moving forward and why it may not be stronger, given that it seems to be mostly a mix issue? Additionally, how does this relate to what you're seeing in the competitive marketplace regarding pricing? I would appreciate your insights on the pricing environment and how you foresee it developing for your company. My second question, which is unrelated, is about the cost-cutting measures you’ve announced. Could you provide more details on where you anticipate those savings will come from and whether this is a temporary initiative or something you plan to pursue consistently in the future?

Sure, Mark. Regarding your question about price mix, our stance remains unchanged compared to earlier this year. We have not yet entered the fall season when beer pricing typically adjusts. As always, we will evaluate the market on an individual basis. However, we still anticipate staying within our guidance range of 1% to 2% for price mix. At this moment, there is nothing to suggest otherwise. Now, what's your second question?

Well, second question was…

Yeah. Cost savings from restructuring…

The cost savings and to what extent…

We do not anticipate any significant cost savings from the restructuring because it primarily involved streamlining certain areas and reallocating resources in others. We analyzed the business to identify areas that could be more efficient, particularly those that are not directly tied to revenue. We believed these areas could function better with improved efficiency. Simultaneously, we are directing resources to what we consider essential areas for revenue growth and innovation, specifically under Bill Newlands' leadership. We are developing a sizable organization to enhance our growth and innovation efforts. Additionally, we are channeling funds towards brand-building activities on the commercial side, which we believe will help drive organic growth. Overall, we are being cautious to ensure we are investing wisely in the future of the business.

And innovation in Chicago is receiving a significant amount of redirection in terms of funding.

For innovation, it's really San Francisco and Chicago where the teams focused on beer, wine, and spirits innovation are located. On the commercial side, we are increasing our spending in advertising and marketing because we believe it's essential to sustain the success we’ve experienced. The commercial aspect of beer is a crucial part of our business, and we need to continue investing in it. We can't rely solely on our current growth while being frugal with our investments for the future. It's important that we take the necessary steps to ensure we can maintain the impressive growth we have enjoyed.

Great. Great. Okay. Great. That’s very helpful. Thank you, Rob.

Sure.

Hey. Good morning. Thanks. It looked to me and you sort of alluded to this that the Meiomi acquisition is a lot like the Mark West deal asset like no assets book one sourced. Am I correct in that, or is that a fair characterization of the business?

Totally fair characterization of the business.

Okay.

It also enables us to reallocate internally some of our resources against higher end Pinot Noir.

Yeah. Absolutely. I mean, this means higher capacity utilization for Pinot Noir.

A significant portion of the benefits will impact our bottom line because, as you mentioned, there are minimal assets apart from some existing inventory in intellectual property. We are entirely capable of continuing to produce the wine in the same style, and this is crucial. Have you tasted the wine?

I have not. I’m yet to try.

It’s an interesting Pinot Noir. I mean it did become successful as it is, because it’s sort of a run of the mill product. It’s a somewhat unique product for a Pinot Noir and that it’s a little heavier and fuller body than I would say your typical California Pinot Noir in that price point.

Got it.

And you tell something about that, Tim?

Okay. I will do more research. And I’m guessing the relevant EBITDA for the $65 million in sales, may not be that big. Do you feel like you can disclose that? Are you basically valuing this off the performing EBITDA?

Yeah. No, we really haven’t disclosed it. But the purchase price pre-synergies was about 10 times the transferred margins. So post-synergies, it’s going to be significantly better than that. So it’s a real good deal especially given the growth rate, which was I think 50% in IRI on over a half a million cases in the last 12 months. So, I mean tremendous deal.

If it’s anything like Mark West, you will have a great success. Thanks a lot.

Better than Mark West, Tim.

Okay.

Not that that wasn’t a great one too.

Thanks.

Hey Vivien.

Hi, guys. Good morning. How are you?

Good morning.

Congratulations, David. My first question has to do with your outlook, clearly quite good. I was hoping you could offer a little bit of incremental color in terms of the positive guidance revision, Corona relative to Modelo please?

I would say the growth gap between Corona and Modelo is 50. It's interesting to note that our portfolio has recently seen substantial growth in Corona Extra. About 40% of this growth can be attributed to the introduction of cans, which we are very pleased about. Given the size of the Corona brand, its growth is beneficial for Constellation. I also expect that the growth rates we’ve been witnessing recently for Modelo Especial and others will continue, and there are no signs that this brand is slowing down at the moment.

Terrific. That’s helpful. Thank you. My second question switching to the wine side of the business. Rob, you outlined a number of commercial initiatives and marketing that’s launching around a number of wine brands. So as we think about total company advertising and promotions as a percentage of sales, certainly that’s stepped up in '15. How should we think about that for fiscal '16 please?

For this year?

Yes please.

Yes. I think that we will continue to see two things, okay, increased marketing and the concentration of that marketing against the smaller subset of brands. As I mentioned, we have initiated TV marketing at fairly significant rates against Black Box, Woodbridge by Robert Mondavi, for example. And with the way that we can measure very directly now through household type surveys and pantry studies the impact of our advertising, we believe quite strongly that some of these campaigns, in particular the Black Box and the Mondavi Woodbridge that we have previously tested is actually not only good for longer-term brand building, but we think that it pays back in the short run with the incremental increase in purchases and consumption that we’ve seen in the test markets where we run these ads. So we are expanding that. And I think that what you’re seeing basically is our depletion growth, which was in the 3.5% range, which is an acceleration, is indicative that what we’re doing is working. And then also from a depletion point of view, which is a little hard to see through our financial results, which are shipment based, we are seeing a pretty significant increase in mix as well against the business. So pretty much I would say that what we are doing here is working pretty well, in fact I think very well. So we are pretty optimistic about the Wine and Spirits business for the remainder of the year.

Thank you.

Thank you so much.

Thank you.

Hi. And congratulations, David. We look forward to spending more time with you. My question is about the regional performance of the Beer business, because it seems like Sydney Big Bear had a very difficult May from what I understand. And there was quite a bit of out-of-date inventory on the shelves towards the end of May, early June. And maybe that is simply in certain regions. But any detail you could give us on what you saw in your brands and whether you think big brands will hold pricing as you move through the summer?

May proved challenging for some of our competitors, but we managed fairly well. We did notice a slight slowdown, likely due to having one fewer selling day in the month, which suggests about a 5% impact. June has been strong, with IRI dollar sales for our Beer business up 14% for Constellation in the four-week period ending June 21. We haven't observed any negative trends or unusual circumstances in comparison to May. While some competitors struggled, we remain steady across all regions, with no significant shifts in geographic performance or sales fluctuations in different areas of the country. Therefore, we have raised our guidance for the year to a 10% sales growth range for the Beer business, as it is clear that our previous projections were too conservative given current and expected trends for the remainder of the year.

That’s excellent. Just a quick follow-on on the cans, there are markets where you’ve tasted them where cans are 6% of mix. Overall, can you give us an idea of where they are now and where you think they could go?

Yes. So just kind of to look at quarter-over-quarter and I will focus on Corona because remember, Modelo Especial is a big can brand, right. But the new launch is really focused on Corona Extra. And for Corona Extra, say first quarter last year, about 3% of our depletions were in cans and this year was about 5%. We clearly believe that we’ll continue to see the can momentum build. And we also know, however, that we won’t end up with a can mix like the domestic players. But we think we can someday line up maybe more in line with some of the other import players in terms of their can mix.

Great job on a terrific quarter, everyone. Regarding the cans, can you provide any insight into what the cannibalization rate is for the cans?

We believe the cannibalization rate is quite low, likely below everyone's expectations. It's difficult to determine the exact rate since we would need to assess how much glass would have grown without the presence of cans. However, we view the cans as largely representing incremental business. Currently, we estimate that 3% to 5% of can use is in situations where glass could not be used, suggesting that cannibalization is minimal and most growth is incremental.

Okay. Thank you. And as my follow-up, it’s my understanding that at California and particularly, Southern California represents something like 25% of the business and Texas 10%. And I was just very surprised that you didn’t apparently see any impact from kind of historically bad weather and rainfalls in those areas and it’s obviously a tribute to the strength and momentum of the business. But I’m just wondering would results have been even better with kind of normal weather in Southern California and Texas?

Yes. Maybe. I would say, yes. I’d say, we did see a little bit of impact of weather towards the end of May but everything just kind of bounced right back in June. So it’s kind of hard to say whether there was really any impact from that. Probably as I said, the sell day was the greatest impact that we had in May, even though the weather had to have had some kind of effect on the sales. But we don’t think that it was anything material and it certainly hasn’t driven any trend change into the extent that I don’t know, in Texas people couldn’t get out and buy beer, they restocked.

Got it. Thank you very much.

Good morning. Thanks for the question. And welcome, David. Two quick ones. One, just on back on Meiomi, should we still kind of expect the kind of one deal a year tuck-in whereas the market changed where you’re seeing more opportunities out there in the wine space?

I believe that stating we do one deal a year is an exaggeration. Since I became CEO eight years ago, we've completed three deals of that type: Mark West, Casa Noble, and now Meiomi. Our strategy remains the same. I don't think there will be more significant deal flow, nor would I anticipate changes in the number or timing of our deals. We are always on the lookout for opportunities that arise occasionally, which can be very beneficial if the timing and situation are right. We aim to avoid trend-driven acquisitions that tend to fluctuate. For example, Meiomi and Mark West are established brands in a stable category. Pinot noir is not a trend but is quickly growing, and we believe it will continue to do so as more people appreciate it. Consumer tastes appear to be shifting towards pinot noir for the long term. Mark West targets the $10 to $12 pinot noir price range, while Meiomi targets the $20-plus range. This positions us strongly in one of the fastest-growing and most consistent segments of wine, specifically the pinot noir varietal. Therefore, there will be no changes in the frequency of such deals.

Okay. Thanks. And that helps. And then David just actually housekeeping on tax rate, tax rate is higher this quarter. Should it just be close to the 30.3 for the rest of the year or is there any given quarter where there is kind of catch-up to get you that 30.5?

Yes. I think as you know our tax rate, our ATR in a given quarter is really driven by the geography of the earnings and our resolution of our various tax issues. So I would say that for us we are confident in the 30.5 rate and we don’t really have a view on the quarters where the delta will land.

Okay. Thanks so much.

Okay. Well, thank you everyone for joining our call today. We covered a lot of ground. But before we go, I want to reiterate how pleased we are with the excellent performance of our business this quarter. Our team plans to continue to capitalize on the tremendous momentum we have underway in the Beer business to drive growth and enhance financial performance. From a Wine and Spirits perspective, we are gaining traction and we are on track to achieve our goals for the year. I’m also excited about the acquisition of Meiomi wine business, which is an excellent addition to our portfolio. Our fiscal '16 is off to a great start and we are eager to continue this momentum into our summer selling season. As we head into the 4th of July holiday weekend, I hope you remember to bring some of our fine wine products to your celebration and to please enjoy them responsibly. We will be on the road next week as we begin to introduce David Klein to those of you he has not already met. So I look forward to seeing you.